Low Risk, High Reward Trading Experiment

Here is some very important info indicating the fundamentals have gone very bullish on the $:

http://www.bloomberg.com/apps/news?...EaJ0&refer=bond

and this:

http://www.bloomberg.com/apps/news?..._w3U&refer=bond

Just as an experiment-go online when London opens tomorrow morning. If the fundamentals are moving this market right now you will see a nice gain for the $ against the GBP and EURO.

One of my strongest ideas is that greed and fear control many of these movements. In my opinion, given how the fundamentals are shaking out, there is greed and fear present in the market. The reluctance of traders to take their profits from Friday (fear) and the increase in their long $ positions (greed).

Should be interesting to say the least....

This trading experiment is unconventional, as the lead entry explains. The goal is to find a way and develop the proficiency to predict the endpoints of trends with considerable accuracy. This is obviously not for everyone. It requires special knowledge and great nerve and discipline. The Itme Theorem of Capital Gains indicates that the percentage of capital earned from a trade is the Risk:Reward Ratio multiplied by the Risk Factor. Entering and exiting close to the endpoints of trends produces a relatively high reward : risk ratio. We believe that 4:1 and sometimes even up to 10:1 are possible using a complex combination of Elliott Wave Theory, the new Q model, fibonacci and other methods. The win : loss ratio needed for a system of this kind to be highly profitable need not be very high. Even a 30% win rate can be very satisfactory.

That being said, one must be very cautious when the market is barreling in one direction with the full force of technicals and fundamentals propelling it in that direction. Especially when the corrective waves become shallow, that is a good sign that the impelling force is strong and therefore the endpoint of the trend will be at or somewhat past the traditional targets.

Up until recently our Elliott Wave analysis of both GBP/USD and EUR/USD indicated that we were in the second upwards "b" wave of a larger "abc" Wave 4 complex corrective wave. That is why we expected the price of GBP/USD and EUR/USD to rise much more last week instead of plummeting. The large downwards move subsequent to the non-farm payrolls report on Friday invalidated the above EW count, and put us into the downwards fifth wave - a new revised wave count. We expected a normal sized wave 4 retracement within this wave last night, but that didn't come. Also, we weren't able to monitor the market at the time the Wave 4 peaked, which would have been the next good low risk : high reward trading opportunity to short GBP/USD and EUR/USD. Having missed the GBP/USD short trade, we tried to predict the endpoint of the downwards fifth wave, but we did an abysmal job of it. In retrospect, the time of day was wrong, the Elliott Wave count was wrong, and we hadn't yet met either of our high probability reversal targets. We can only plead temporary insanity.

All trends come to an end, reverse, and proceed in the opposite direction. So there is always an optimum low risk : high reward trade at the endpoint of each sizeable trend. However, the high leverage in a forex account means that we need to be very precise when trading against a trend, or even with a trend, because the inaccuracy in pinpointing the endpoint or even the midtrend retracements may be too large for our account size to handle and expose us to too much risk.

The lesson for me in all this is to take every possible precaution when qualifying a trade, and avoid being over optimistic or careless, because what we are attempting is very difficult, so we need to employ every tool we possess to maximize our probability of success. If our number of trades becomes smaller and smaller, but our success rate increases, that will be a sign that we are moving in the right direction.

Has this been published?

All the details are here:

http://www.forexfactory.com/forexforum/showthread.php?t=6078

At the beginning of the thread originally titled " From $7.00 to $770 Billion in 2 Weeks Trading Program" and later renamed by the moderators as a satire due to their inability to believe it is possible to complete four 5:1 reward : risk trades per weekday.

For some reason I'm having trouble with this link. But you can use the search function to locate the posting.

Our Trade Signal #190 Buy USD/CAD at 1.1132 from September 28 narrowly missed being triggered, then proceeded to the target. Our Intellicharts 1 minute charts were malfunctioning when we were assessing the precise entry point, which contributed to the fact that we missed the entry by 6 pips. This is an argument in favor of having a backup set of charts available at all times. There are free charts that will do.

In spite of the fact that this trade signal was not triggered, I consider it a good trade signal in principle. If entry points and targets are set at conservative values, we may not be able to benefit from every potential trade opportunity, but the ones we do participate in will be on our terms - which are parameters of success.

This trade had the added feature that we advised exiting near to the top of Wave 3 and re-entering at the bottom of Wave 4. This increases the return on capital of the trade dramatically because, first of all, more pips are earned, and secondly, because the second trade compounds the earnings from the first trade.

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Previous trade signal and comments:

Comments on Trade Signal #190A Buy USD/CAD at 1.1086
<hr style="color: rgb(209, 209, 225);" size="1"><!-- / icon and title --><!-- message -->Sunday October 8 2006 at 3:00 ET

We slightly missed the entry on this USD/CAD long trade on September 28 because we weren't paying attention when it came to the bottom, and then due to carelessness in counting the 1 minute waves thought it would go down a third time to the bottom, so we missed the entry by 6 pips.

We then advised an interim exit at 1.1200 before what we believed would be a major bounce ("We can re-enter to capture the next phase of the trend after a bounce."), which happened 18 pips higher at 1.1218 and descended 74 pips to form an "abc" corrective wave.

On October 4 we revised the target from 1.1300 to 1.1315 . The same day it rose to 1.1305, missing our revised target by 10 pips. The revised target of 1.1315 was a high probability target, which may yet be met. But we should employ the conservative target in our trades if we are leaving them to exit automatically. In this case the conservative target is 1.1300, which we correctly specified during the original trade signal. A lapse of judgement caused us to revise this conservative target to our exact "high probability target", which has a lower probability of being met than our "conservative target" which is met almost 100% of the time.

There are several lessons to be learned here:

Pay attention all the time to catch the best entry price.

Be very careful and conservative when counting the smallest wavelets. This is very painstaking, time consuming, and requires tons of practise.

Target the conservative target, not the exact target when leaving the trade on "automatic".
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Earlier trade signals:

USD/CAD analysis for Wednesday October 4 at 3:00 ET
Wednesday October 4 at 3:00 ET
Because, as we discussed earlier, we didn't pay close enough attention to the one minute chart in assessing the Elliott Wave pattern when setting the entry price on this trade, the price of USD/CAD didn't return to the bottom a third time as we had expected, so our entry price on our long USD/CAD was missed by 6 pips.
Then we decided to try something different and set an interim target and then advise re-entry after a sizeable correction.
As it turned out, our revised target of 1.1200 was met quickly and surpassed by 18 pips, followed by a 74 pip retracement to 1.1144. This would have been a good re-entry price, after the large "abc" correction. Our targetting system would have exited the sell trade if one had been entered, or to simply enter a new buy trade at 1.1154. The new target for the long USD/CAD trade is 113.15
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Friday September 29 at 4:30 ET

Adjust target for Trade Signal #190A Buy USD/CAD at 1.1086 to 1.1200. This is an interim target. We can re-enter to capture the next phase of the trend after a bounce.
__________________________________________________ __________

Thursday September 28 at 18:30 ET

A very strong downwards move on USD/CAD on September 27 at 14:30 ET went 9 pips past the stop of 1.1097 in our Trade Signal #190 Buy USD/CAD at 1.1132. We believe that it will come down one more time at least to 1.1086 or further, where we can re-enter this trade. The price may descend further, however, to as low as 1.1045.

Trade Signal #190A Buy USD/CAD at 1.1086
Stop is 1.1039
Target is 1.1300
Risk is 50 pips
Reward is 210 pips

Reward : Risk Ratio is 4.2 to 1

For research purposes only.

Another thing that I believe most traders overlook is the importance of having specific goals for what they are trying to do here. Profits and losses tend to be quantified in dollars rather then percentages, which is a better way to look at things in my opinion.

Here's a question for you-do you think a $300 profit is good for a trade? Your answer should be based on how much is in your account at the time and not on the pervieved value of $300.

If you have $2500 in your acount and you cleared $300 in weekly profit, I submit that you ave done very well indeed. Why? That $300 represents a 12% gain on your account for the week. Taken another way-If you take a 2 lot position ($20) you only need to clear 15 pips to earn that 12%.

What if you could clear 12% on your account every week by trading larger lot sizes as your account grows? When you got up to $5000 in your account, you could trade a 4 lot position. That measley 15 pips is worth $600.

I'll leave it to one of the bean counters to figure out what 12%/wk grows to. You'd be surprised at the number, I'm sure. Can anyone clear 15 pips/wk?

Newstrader, I agree that profits and losses should be quantified in percentages rather than dollars, and that 12% per week compounded would make a patient person with an initial capital of $1,000 into a millionaire in about 62 weeks, which is great.

I think that your 15 pip per week idea isn't quite practical, though, for most people, even though it sounds deceptively easy. If a person had $2,500 and took a 2 (regular) lot position, only $500 would remain in their account. They would be margined out if their account balance went down to some number like $50.00, so they would only have about $450.00 in available capital. So they would be risking $450 out of $2500 which is a risk factor of about 18%. At $20 per pip that represents a loss of 22 pips. If their spread is 5 pips, then they will need to be able to consistently win trades making 15 pips with an 18 pip stop. This is a reward : risk ratio of less than 1: 1. Their account would grow at 12% per week only if they could win almost 90% of trades with an approximately 1:1 reward : risk ratio and employing an 18% risk factor. For most traders, the 90% win rate and 20% risk factor would be a problem for various reasons.

Trend reversal prediction and recognition experts should check out the work of Thomas DeMark, and particularly his Sequential Indicator. Here is a new thread on this topic:

http://www.forexfactory.com/forexfor...ead.php?t=8915

Ah ok, you just state it like it has been published in some well known book or something. My apologies.

Hi Twinchell,

What better place to publish this highly useful Theorem? Where the forex traders are! This theorem applies to all kinds of trading, though. The Theorem is true. You can verify it mathematically, and also test it empirically in your own account, whether virtual or real. It works! It is true. It gets to the heart of trading, and helps you to evaluate the reward : risk ratio of any trade and performance of any trading system very quickly.

Hi itme,

Here is the link to your thread "From $7.00 to $770 Billion"

http://www.forexfactory.com/forexfor...&page=11&pp=15

A very interesting read.

Itme before you move on to your next experiments and trading adventures, I'd like to comment on something you said in the $7 into $770 billion(or w/e it was) thread. You mentioned the hindering forces, whether they be governments, banks, *illuminati*, or some other mysterious force in the world, that makes it very hard trying to acquire enormous wealth. I've actually had a few run in myself with this "force". It's initial and most frequent appearance is the common person laughing and even deriding you for trying to attempt the "impossible". Examples would be in the thread previously mentioned where various posters where suggesting that your thread must be a joke and that it should be deleted. They even called your genius venture a waste of time and forexfactory thread space. I could go on and on about what they call IMPOSSIBLE is not, NOTHING is IMPOSSIBLE, only maybe IMPROBLE, and that’s the distinction they fail to see.

I'm sure you know all about off-shore accounts and things in that realm. I've been in several money making ventures that were put out 200% and above a month, only for something to come along and break everything up. Weather it was a government that could tell us exactly what we were doing that was illegal, just that it was unusual, improbable and not good for them...(money=power, and we'd be threatening them) or even freakish stuff, like communication problems or hackers, or fellow traders stealing the account money(how random is that?). For instance, what prevented your $7 to $770 billion experiment from taking off? I doubt it would have happened if it was just a $7 into $70 experiment. Anyway the secret, since you do seem very bent on getting to your goal of predicting exactly the financial markets, is to keep as low a profile as possible. You talked about your mentor having trouble with his trading and investing in the <st1:country-region><st1lace>US</st1lace></st1:country-region>; I’m not surprised one bit. He should have kept everything in another country, if not several and then slowly increased his profile. So kudos to your progress so far and your future forex adventures. I too refuse to ever give up; personally I am aiming for 600% a month, investing only 5% of my account in each trade. But that’s down from 1600% a month. And I've done it before but I've had trouble knowing exactly when to get out. So with this thread as an inspiration, I'm going to start learning Elliot waves to help me. Since we both seem to have determination that knows no end, maybe we'll meet up someday in some secret circle. Till then adios, good luck and happy trading and investing.

By the way, are there certain resources you would recommend in learning elliot wave theory?

Wednesday October 11 at 3:45 ET

GBP/USD and EUR/USD are now progressing upwards in the upwards wave "c" of an upwards "abc" corrective wave. They are in the fifth miniwave of the wave "c" so the top of this mini-wave will be the top of wave "c" and also the top of Wave 4. I don't expect a particularly large Wave 5 down, but it is an impulse wave, so it is possible. It is probably worth shorting EUR/USD or GBP/USD at the top of this corrective wave. The current price of EUR/USD is 1.2545, with the top of "c" at about 1.2555, and the first probable target at 1.2460, and the current price of GBP/USD is 1.8556, with the top of "c" at about 1.8580, and the first probable target at about 1.8450, and another at 1.8400.

Trade Signal #202 Buy GBP/USD at 1.8577 or as low as possible

Stop is 1.8539

Target is 1.9050

Risk is 53 pips
Reward is 468 pips
Reward : Risk ratio is 8.8 to 1

i'm now in a long posetion from 1.8543 lol ????????????
itme what to do go long or short......
all my sharts said it's gona go long for good

ITME, i think your GBPUSD trade should stay on. i think it's target will be reached in a week or 10 days. the go long GBP. so hold to it. also for the euro.


i have a question.
i know you are calculating tisk reward and my question is not that important but i would like to know the percentage of your winning trades so far. thank you.

Dear Mandoaddam,

If I were you, I would exit my long GBP/USD about now at 1.8573 and reverse my position. But you do what you think is best.

Itme

Dear Nicolas,

I haven't bothered calculating the percentage of winning trades for several reasons. Mostly, because it is irrelevant to my purpose, which is to experiment and learn. Second, because it would be misleading if done crudely. I would need to distinguish between winning and losing trades according to which are consistent with my current protocol, and which aren't. There are two issues - the performance of my system, and my performance at executing my system. And my system is constantly evolving. Also there are near misses, where the stop is barely hit, or the target is almost met, or the entry is just missed, but the target is hit, and the trades where the concept is totally incorrect.

Last, and most important, if I posted the "performance" of my research project, then it might encourage people to either dismiss the concept altogether of low risk / high reward trading employing trend reversal prediction techniques, or inspire unwarranted confidence and cause people to trade these "signals" indiscriminately with real money, even though the system and my skill are still evolving.

Lastly, percentage of winning trades is only one of several criteria pertinent to the effectiveness of a trading system. Reward : risk ratio, win rate, distribution of losses, duration of trades, and frequency of trade opportunities are all pertinent. To assess the performance of a trading system, the results would need to be entered into an excel spreadsheet to compound the results. A low risk / high reward trading system can be deceptively profitable even with a quite low percentage of wins.

Thanks, AICCIA, for a thoughtful and interesting post. Few people will have to deal with the politics of high performance trading, but it is an interesting topic, and a real concern for a few people. Regarding the $7 to $7 trillion dollar thread, you are quite right that the responses it engendered are illustrative of the built in hostility to unorthodox assertions that some people express in an almost reflexive, though vociferous fashion.

The cause of the non-implementation of the "get insanely rich overnight" plan to date is nothing political, however. My trading partner spent several months working until his leg was injured, then resumed trading. However, it turned out that he didn't really believe in the system which would be necessary to produce the results indicated. He combined McRae trendlines, Camarilla lines, moving averages, Bollinger bands, some proprietary indicators and God knows what else into such a mixed up collage of techniques that he no longer had space on his graphs, time or mental attention to execute the methodology which he, I, others and our mentor have all successful employed in the past to enter trades with a ten pip risk and 50 pip or greater upside. He was so overwhelmed with considerations and so incompetent at this core, hyper-accurate and reliable system that his results were very inconsistent. Maybe he will renounce all the clutter one day and focus on the only method I know of that can stand a chance of accomplishing the required style of trading to double capital four times daily.

Wednesday October 11 at 6:00 ET

Trade Signal #203 Sell EUR/CAD at 1.4274

Stop is 1.4305

Target is 1.4075

Risk is 41 pips

Reward is 189 pips

Reward : Risk ratio is 4.6 to 1

For research purposes only.